How Expiring Bush Tax Cuts Affect Taxpayers

by Ryan Guina

Several years ago the Bush Administration created a series of tax cuts to try and spur along the economy. The resulting tax cuts put more money in the pockets most Americans, but the majority of those tax cuts are set to expire at the end of 2010. Some of the cuts will be supported in Congress and may be extended, but overall there are some serious changes in store for all taxpayers. The expiration of the Bush tax cuts is not only going to affect the wealthiest of Americans. Even Joe Taxpayer will feel the pinch if the tax cuts are left to expire without the intervention of President Obama and Congress.

How Expiring Bush Tax Cuts Affect Taxpayers

For families across the nation, higher tax bills are on the horizon. The only way to prepare for the inevitable is to understand what is going on. Here is a list of the major changes coming your way:

Expect Higher Tax Rates for Everyone

Many people believe that only the top tier of tax brackets will face higher income tax rates when the tax cuts expire, but that is not the case. If Congress does not take action, the marginal tax rates will go up across the board. Right now there are six tax brackets coming in at 10%, 15%, 25%, 28%, 33%, and 35%. If the tax cuts are not extended, these six brackets will be replaced by the pre-2001 tax levels, which featured the following five tax brackets: 15%, 28%, 31%, 36% and 39.6%.

Projected 2011 Marginal Tax Rates

The following chart is the projected marginal tax rates for a single tax payer if the Bush Administration tax cuts are allowed to expire. Those for married individuals see a similar rise, although married filing jointly may also pay the marriage penalty tax (see below for more information).

Taxable Income 2010 Tax Rate 2011 Tax Rate
$0 to $8,500 10% 15%
$8,500 to $34,550 15% 15%
$34,550 to $83,700 25% 28%
$83,700 to $174,650 28% 31%
$174,650 to $379,650 33% 36%
$379,650 and above 35% 39.6%

Expect a Phase-Out Rule for Personal Exemptions

Before the tax cuts were in place, a phase-out rule eliminated the personal deductions of a higher-income individual. Unless Congress steps in, personal exemptions will phase out for higher income earners and they will be required to pay more taxes. In 2010, personal exemptions were $3,650, and they should be similar next year. If your adjusted gross income goes over $252,000 for joint filers, $168,000 for singles, $210,00 head of household, or $126,000 married, filing separate, then you can expect a big tax hike in the coming tax year.

Expect a Phase-Out Rule for Itemized Deductions

Before the Bush tax cuts, a phase-out rule would have eliminated up to 80% of deductions for higher income individuals who claim itemized deductions like mortgage interest, local and state taxes, and charitable donations. The phase-out rule was eliminated in 2010 but is expected to return. Taxpayers who have adjusted gross incomes above $170,000 ($85,000 for married, filing separately) will be affected by this phase out rule.

Expect Higher Capital Gain and Dividends Taxes

Currently, the maximum federal rate on capital gains and dividends is 15%. In 2011, the maximum rate will increase to 20% on long-term gains and for dividends the rate will jump to 39.6%. President Obama has promised to keep the maximum rate at 20% but there are no guarantees until the new tax laws are voted on and passed.

Expect Marriage Penalties

The standard deduction for couples who are married and file jointly is double the amount for single filers. The Bush tax cuts held provisions to ease the marriage penalty, which previously forced married couples to pay more taxes than when they were single. In 2011, joint filers standard deductions will go back to about 167% of the amount for singles without Congress’s intervention. If no help arrives, married couples in the lower and middle income tax brackets will be paying higher bills.

Expect a Lower Child Tax Credit

The Bush Tax cuts increased the child tax credit from $500 to $1,000 per child. This credit will expire and revert back to $500 per child.

These tax changes are not final

It’s important to note that these are only potential changes to the tax code and they will not be finalized until later in the year. Basically, Congress needs to vote to extend some or all of the tax cuts, or allow them to revert to the previous levels. If Congress does not step in or President Obama does not approve any voted cahnges, the tax bill of almost every American taxpayer will rise next year. Stay tuned. This will be a highly debated topic in Congress this fall.

Published or updated August 9, 2010.
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{ 9 comments… read them below or add one }

1 Kate Kashman

Wow, Ryan. I knew that changes were possible, but I didn’t realize how big the possible changes are. In theory, my family could be paying WAY more taxes next year. (And we’re already dealing with a huge increase this year.)

Every year, I estimate what our tax liability will be in hopes of coming out with close to the right amount of withholding. Every year, our situation or the law changes and my estimates are useless. I’m about to give up πŸ™‚


2 Ryan

Kate, I gave up trying to match withholdings as soon as I became a business owner. πŸ˜‰

These potential changes are huge and I can’t think many of them will change in some form before they are allowed to expire. Reverting to the pre 2001 taxes would be the most unpopular move President Obama would have made to that point in his administration. I think we will see some extensions and modifications, but who knows how many, when, and in which form.


3 fredct

Unless your income has gone well up (then good for you πŸ™‚ ), I don’t know why that would be. There were few significant tax changes from last year to this, and those I know of generally were lower taxes.


4 fredct

To be clear, my last post was in response to Kate’s comment: “And we’re already dealing with a huge increase this year.”


5 Kate Kashman

You are right, Fred. Due to my husband’s military service, our taxable income is erratic. He was in a tax-exempt combat zone for all of 2009, so we are facing a huge jump in taxable income for 2010.

We appreciate the tax-exempt status – it makes the whole “imminent danger” thing slightly more palatable – but it also makes tax planning nearly useless.

6 Jarhead

The whole tax code needs to be rewritten. I think they need to end all deductions and go to a flat tax. I will pay more obviously (got more than I had withheld last year), but the country will be the better for it. Plus we can get rid of the IRS and save money in government. There might be a few people losing jobs, but do we really need that many tax lawyers? It is time for DC to quit pandering to the voters, not worry about getting re-elected and do what is right for the country not themselves.


7 Greg McFarlane

It’s a crying shame Jarhead’s idea isn’t on the top of the national dialogue.

Tell me what would be wrong with this: a standard $20,000 deduction for everyone, 17% on the remainder. That way a guy making $20,000 pays nothing, a guy making $20,001 pays 17Β’, and Kobe Bryant pays $4,213,662.50 (on the $24,806,250 he receives from the Lakers, excluding other sources.)

In theory, this idea of One Deduction/Constant Rate On The Remainder should have bipartisan support between the tax-and-spend Democrats and the ostensibly fiscally conservative Republicans. The only thing they’d need to reach a consensus on is the numbers; how big a deduction to grant, and how big a rate to charge on the rest. Perhaps Henry Waxman would argue that the numbers should be $100,000 and 40%, while Ron Paul would prefer $0 and 1%; Congress could debate the final numbers for as long as it takes.
But anything’s better than we’ve got now, at least until we see next year’s even more complex tax code.


8 Jarhead


I like your idea a lot. I would say the line to make the cutoff at would be the poverty line. If I am not mistaken they set a poverty line for any family size from single to however many kids you have.

I also think that you shouldn’t get more than you pay in. Last year my return was nearly half of my taxable income and more than 10,000 dollars more than I had withheld from my check. Basically whoever didn’t get all that they paid in back gave me more than 10,000 dollars mostly because I bought a house. I am not going to not take it but I still don’t think it makes fiscal sense for the G’met to give me that kind of money.


9 J Martin

The president has vowed to extend the tax cuts for individuals with less than $200,000 in annual taxable income and couples with less than $250,000 β€” about 98 percent of American households. About 315,000 households report adjusted gross income of $1 million or more.


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